Arizona Real Estate License Practice Exam 2025 - Free Real Estate Practice Questions and Study Guide

The minimum holding period for declaring a tax-free gain on the sale of a personal residence is two years. This is established under the Internal Revenue Code, specifically Section 121, which outlines the criteria for the exclusion of capital gains from the sale of a primary residence.

For a homeowner to qualify for the exclusion of up to $250,000 in gain (or $500,000 for married couples filing jointly), they must have owned and used the home as their principal residence for at least two out of the five years preceding the sale. This two-year requirement ensures that the tax benefit is applied to individuals who have genuinely established their home in the property over a significant period, thus reinforcing its designation as a primary residence.

Other durations listed do not meet the IRS requirements. Specifically, periods of 12 months or 18 months do not suffice to qualify for the full tax exclusion, and while there is no minimum holding period for certain exceptions involving a like-kind exchange or certain involuntary conversions, those scenarios are different from the general tax-free gain opportunity for personal residences. Consequently, the correct answer accurately reflects the understanding of the tax implications in real estate transactions related to personal residences.